Obama's (Gas) Taxing Problem

Goodness knows, President-elect Obama has his legislative hands full. Maybe that explains why he has taken the idea of increasing gasoline taxes off the table, saying that Americans had enough economic burdens at the moment. Nominees like Steven Chu, the Nobel Prize winning physicist who will become Energy Secretary, dutifully echoed Obama's view even though in Chu's case he has long supported higher fuel taxes.

But by failing to raise the gasoline tax, the president-elect risks complicating another problem: Fixing the U.S. automobile industry.

Here's the problem. Obama and leading members of Congress keep saying they want ailing automakers to make more fuel-efficient vehicles. But the automakers in the past made more money on the guzzlers; in the future, they will have trouble charging enough to make money on new cars using costly new technologies for plug-in or hybrid cars. So the car company of the future may be a money-losing operation, just like the car company of the present.

Raising the gasoline tax would increase consumer demand for more fuel-efficient vehicles. That could help automakers charge more for them and make more money on sales of plug-ins, hybrids or more efficient conventional engines. Not surprisingly, Ford and General Motors both belong to the U.S. Climate Action Partnership, which this week proposed a detailed blueprint for a cap-and-trade system for carbon dioxide emissions. Such a system would put a price on carbon and would effectively tax gasoline and all other fossil fuels.

After being burned last summer by sky-high gasoline prices, do Americans really need higher gasoline taxes to get them to buy fuel-efficient cars? Yes, actually. Americans have an astonishingly short memory about gasoline prices. Sales of the Toyota Prius have hit the skids now that gasoline prices are back below $2 a gallon. And sales of SUVs are relatively strong compared to many other models.

If Obama did want to raise gasoline taxes without imposing a hardship on Americans at a time of economic duress, there are (at least) two ways of going about it other than throwing it out the car window. First, he could cut other taxes to compensate people for the fuel tax. Second, he could delay the effective date of the tax, or increase it in small steps over time. A phased-in tax increase would still have a big impact on the choices people make when purchasing cars, which tend to stay on the road for 10 years or so.

A gasoline tax has a variety of other benefits. Harvard economics professor and former chairman of the Council of Economic Advisers under President George W. Bush, Greg Mankiw, listed them in an October 2006 Wall Street Journal article. (Full disclosure: I have known Mankiw since grade school.) The other benefits include: helping the environment by reducing fuel use; reducing road congestion by encouraging mass transit or car pooling; boosting government revenues and shrinking the deficit (unless other taxes are cut by equal amounts); reducing crude oil prices by reducing demand (as a result, the increase in retail pump prices would be less than the increase in the tax); and bolstering national security. If the United States cut consumption, it would also help the trade deficit; oil imports make up a huge share of the imbalance.

The list is more timely than ever. But the gasoline tax, while popular among economists and some columnists, remains one of Washington's most feared issues. Ever since President Clinton was burned for trying to raise it, the gasoline tax has been frozen in time, becoming smaller and smaller in inflation-adjusted terms. For Republicans who claim to rely on market mechanisms rather than regulation, the tax should be attractive because it might be more effective than the complicated CAFÉ regulations for fuel efficiency. For Democrats, it should be attractive for environmental reasons. Members of both parties should be worried about the deficit.

But for the moment, this is one good idea that seems destined to die yet again.

Comments (15)

robert23 :

It's a weird mentality that wants to tax everyone they disagree with out of business. the legitmate purpose of taxation is to raise needed revenue. The Boston Tea party and the Whiskey rebellion are predictible results of taxation unconnected to the need for revenue.

For a government to be functional most of its people must have confidence and faith in it. Similarly most people will pay taxes if they believe government needs the money. Conversely they will resist with all their might if they come to believe that the tax is targeted to screw them by political opponents.
Political taxes as distuingished from bona fide revenue raising taxes will destroy the country. While an argument could be made that
some additional revenue is needed for fixing roads and bridges etc., it is very clear that the motivation for pressing for higher gas taxes has little to do with fixing roads or building new freeways.

The auto industry will rise or fall on its own merits. If it declares bankruptcy, a stronger, more vibrant industry will emerge in 3-5 years. One that will make better cars, be freed from punitive labor agreements, and will be less tied to to special interests.

If it goes on like it is now, it will be forever crippled, much like the Italian or French auto industry and for precisely the same reason... there is a big lobby by organized labor to have the government prop up wages and membership in the union.

We don't need a manhattan project (stupid idea), or some idea of being more efficient. We simply need to let the market reward smart, well-run companies, and punish dumb, poorly run companies. Every time we protect an industry, all of us are worse off.

At its peak last summer, the pump price of gasoline in the US was still about half that found in Japan and most European countries. Federal and state fuel taxes in the US currently average about $.48/gal, while the combination of sales, value added & excise taxes in those areas averages about $4-$5/US gal, and has for many years. European & Japanese (& more recently Korean) vehicle manufacturers thus enjoy a reliable home market for fuel efficient models that can be adapted for the US as the occasion demands, as it did in the late 70’s and early 80’s, and again more recently. The Toyota Prius, for example, was initially developed in the late 1990’s just for Japan and Europe where fuel costs could justify the higher selling price. Only after a few Toyota marketing folks in Los Angeles, sensing the strength of the nascent green movement, convinced top management of the potential demand did they agree to spend the necessary funds and two years to do a fully compliant US model.
Another lesson from the 70’s-80’s: when CAFÉ went into effect and was then followed in the mid-80’s by another oil price collapse, consumers reacted by changing their driving habits. The California Air Resources Board staff, trying to figure out why their large computer model of the LA basin was predicting lower SMOG levels than were actually being experienced, discovered that their projections of annual VMT – vehicle miles traveled – were lagging actual consumer behavior. The cost of driving had dropped significantly and people reacted by driving more.
We must summon the courage to phase in some form of carbon tax, and do it soon.

Bruce18 has it right. The market has shown us that gas price increases reduce consumption (I think $3 was the bar in my community). This proof provided by the market is all we need to institute a substantial gas tax that keeps gas above $3 per gallon. Bruce18 is also right that people have no short term memory--a gas tax will provide the requiste boost to that memory problem.

Bruce18 wants to drive his SUV...let him pay the tax. He has expressed his preference and he can prove it at the pump.

I want to ride mass transit to save the economy and the environment. WIN WIN WIN!!!

Until oil, coal has it's true cost in it instead of in our income tax we'll never become energy independent and $400-700B/yr will go to Iran, Russia, Venezuela, oil dictators and pay terrorists.

I built and drive an EV but still subsidize gas guzzlers and those above despite using little oil in my income tax. Why?

So unless you want those above to keep killing, hurting, bullying everyone we need a gas tax tso it pays it's true cost or we'll keep fighting oil wars, paying through the nose or we can tax it and then use those taxes to become energy independent.

Think how much better our economy would be with $700B more spent in America instead of going oversea to our enemies? The taxes can go to lower payroll taxes so the poor, middle class come out the same and help them buy higher mileage or electric cars so their fuel costs are lower and we are considerably richer, our enemies poorer.

To me it's a no brainer. And we voted for Obama to make it happen, everyone expects it so let's do it because it's our best course.

And direct taxes increased $.10/month over a yr, not the cap and trade scam. This goes for coal too. It's hard for EV's, RE to compete when entrenched fossil energy is subsidized against them though I do both beating fossil fuels with EV's and RE now but I have to build my own as you can't buy them competitively against such subsidies.

The whole idea of "collective knowledge of the market" being so great is the biggest bunch of BS ever. Because the market is too easily manipulated. Look at Worldcom, Enron, and the now current clusterf*ck that is called Wall Street.

Why do we think that government has better knowledge of what the price of a commodity should be than the collective knowledge of the market. Whatever the latest political problem du jour should be fixed by government changing the market price signals? Hasnt worked before, why now. There is no such thing as energy independence, not in a world with global trade. People dont have short term memories, they buy what they want and can afford. Even at $5 gallon, I would prefer an SUV over a Prius and the economics still favor the SUV. I'll never consume the upfront price differential for the "eco friendly" prius.

People are an interesting bunch. Their brains have a very short term memory and six months of lower gas prices will outweigh the decision to make a responsible choice when purchasing their next vehicle. It is hard to get prople to make a change. We tend to like it the way it is especialy if we will be in the slightest bit inconvenienced by cost.

I personally believe that there are two things that should be taxed and heavily taxed immediately. I think a gas tax or an extra heavy tax on any vehicle that doesn't get at least 30 miles to the gallon is in order, lest people forget the pain of 100+ dollar fill ups for their mega SUVs. In addition to that, there is the plastic bag issue. People have succumbed to the convenience of going to the grocery store or even a department store and walk away with all of their items (sometimes even items that already come with a handle) in dozens of cheap plastic bags. The bags get holes in them and are not really reusable more then one time and although they can be recycled, most people do not because it is inconvenient. Although grocery stores and some department stores have made a point of offering for sale at minimal cost the heavy duty environmentally responsible bags, relatively few people use them. It is time to heavily tax the use of those plastic bags to get people to give up the addiction to the convenience of them. They are an environmental eye sore as they cling to trees etc from where they blow around and they are also environmentally irresponsible because of the amount of petroleum used to manufacture them and perhaps more importantly, they never ever really go away! They will still be in the landfill 50 years from now.

Therefore, since people have difficulty transitioning to a new way of doing things (unless it is really something fun), then we need to ensure change and social responsibility through the use of some negative reinforcement such as a heavy tax on the targeted issue. In addition, it is important that other incentives are provided to encourage the change. But incentive will not work without reinforcement - just think about raising a child and eliminating bad behavior.

A gas tax increase is only a small piece of the puzzle, while a cap and trade system - a carbon dioxide tax, will have a much larger, positive impact on the economy as a whole and help propel it into a new, greener future. CO2 is a waste, and any waste generated and dumped on the public for free creates a false impression of profits, which is lost when one must clean-up the waste. CO2 and other greenhouse emissions need to have a cost, so carbon fixing technologies, such as growing bamboo for furniture and fiber, can be made profitable, not just for the product, but for the carbon fixation credits sold to the waste generators. A CO2 and other greenhouse gases tax creates the needed incentive for new, green businesses and industry that are necessary if we are going to confront the problem of global climate change and try to establish a sustainable economy.

A gas tax increase is only a small piece of the puzzle, while a cap and trade system - a carbon dioxide tax, will have a much larger, positive impact on the economy as a whole and help propel it into a new, greener future. CO2 is a waste, and any waste generated and dumped on the public for free creates a false impression of profits, which is lost when one must clean-up the waste. CO2 and other greenhouse emissions need to have a cost, so carbon fixing technologies, such as growing bamboo for furniture and fiber, can be made profitable, not just for the product, but for the carbon fixation credits sold to the waste generators. A CO2 and other greenhouse gases tax creates the needed incentive for new, green businesses and industry that are necessary if we are going to confront the problem of global climate change and try to establish a sustainable economy.

All the burden does not have to fall on the gas tax. Start with eliminating tax benefits and subsidies to the oil industry. Then, increase vehicle taxes on automobiles and any other vehicle whose energy consumption needs change - no exemptions for pickups, etc. And do not forget social pressure. A long list can be developed of things government can do to change gasoline consumption permanently.

The critical aspect of this much needed policy change is quick action by the new administration to let the public and business community know a serious and permanent change is coming - slowly, at first, but surely. The environment, national security and, eventually, even the economics of energy demand such a change.

The Manhattan Project is a misleading analogy in the current situation. The atomic bomb was developed under the auspices of the U.S. government and the ultimate customer was the U.S. government. New energy fuels and equipment can be developed by the government, but to do any good they must prove successful in a competitive market. That is why we need new price signals in the market that could come from a fuel tax or carbon caps. An effort to just solve this problem in the lab without changing price signals will prove futile.

The high cost of fuel this past year did serious damage to our economy and society. After a brief reprieve gas prices are inching back up again. Our nation should not allow other nations to have such power over us and our economy . We have so much available to us in the way of technology and free sources of energy. WE seriously need to get on with becoming an energy independent nation. We are spending billions upon billions in bail out dollars. Why not spend some of those billions in getting alternative energy projects set up. We could create clean cheap energy, millions of badly needed new green jobs and lessen our dependence on foreign oil all in one fell swoop. I just read an eye opening book by Jeff Wilson called The Manhattan Project of 2009. It would cost the equivalent of 60 cents per gallon to drive and charge an electric car.If all gasoline cars, trucks, and SUV's instead had plug-in electric drive trains, the amount of electricity needed to replace gasoline is about equal to the estimated wind energy potential of the state of North Dakota. Why don't we use some of the billions in bail out money to bail us out of our dependence on foreign oil? This past year the high cost of fuel so seriously damaged our economy and society that the ripple effects will be felt for years to come.